When the Biden administration’s student debt relief plan comes before the Supreme Court next month, it could benefit from an unlikely ally: inflation.
The administration has issued its discharge plan under the HEROES Act, a statute that permits the Secretary of Education to “waive or modify” federal student loan requirements in connection with a “national emergency”—here, the Covid-19 pandemic. But the HEROES Act only allows the Secretary to invoke this authority for certain enumerated purposes, including to “ensure” that “recipients of student financial assistance … are not placed in a worse position financially in relation to that financial assistance because of their status as affected individuals.” The statute defines “affected individuals,” in part, as those who have “suffered direct economic hardship as a direct result of … [the] national emergency, as determined by the Secretary.”
In litigation, the federal government has primarily relied on one (eminently reasonable) statutory theory. Based on past experience with forbearance terminations and recent survey data about borrowers’ financial well-being, the administration argues that upon the resumption of loan payments, which have been suspended on account of the pandemic, many borrowers would face an elevated risk of delinquency or default. A one-off, limited discharge of student debt, by the administration’s logic, is therefore necessary to ensure a smooth transition back into a normal repayment cycle.
We write to offer a complementary — and to our knowledge, unelaborated — justification under the statute, predicated on the Covid-19 pandemic’s role in driving recent inflation.
A raging debate in Washington over the Federal Reserve’s current macroeconomic policy has obscured an important consensus among mainstream economists: the Covid-19 pandemic is responsible for a substantial share — conservatively, between 40-60 percent — of the past two years’ price acceleration. For example, one of us has co-authored research concluding that the pandemic distortions to both demand and supply were the primary driver of recent U.S. inflation. A study from the Federal Reserve Bank of New York found a “very strong” correlation between price increases and global supply chain “pressures,” which the report notes largely stemmed from the pandemic; the chief economist of Moodys’ Analytics, Mark Zandi, made a similar point in congressional testimony, arguing that Covid-19 supply interruptions have “ignited the high inflation.”
We could cite additional empirical research: many other economists, including at the Federal Reserve Bank of San Francisco, have further documented how pandemic supply effects contributed to inflation. But a narrative account of the Covid-19-inflation saga might prove even more clarifying.
Covid-19 affected both the demand and supply sides of the inflation equation. In its first several months, the pandemic induced huge demand shifts, as consumers’ health concerns, shutdowns and quarantine protocols moved spending out of face-to-face service sectors (gyms, travel, concerts) into durable goods, like cars and houses. At the same time, the pandemic introduced bottlenecks, like port and shipping facility shutdowns, into key global supply chains. As consumer demand shifted rapidly into the very sectors where supply was collapsing, prices rose sharply. The expeditious vaccine rollout produced another set of shocks: relatively abruptly, Americans began returning to their pre-pandemic lives, once again shifting spending patterns—in some cases to sectors that had shuttered production facilities or laid off workers, and so could not quickly ramp back up. The Omicron variant again interrupted supply chains and spending habits, as have subsequent variants.
This “shocks and ripples” pattern repeated itself within sectors across the economy. For example, many Americans moved during the pandemic. Younger adults temporarily moved back in with their parents. Some city dwellers, suddenly spending more time at home, decided to buy or rent larger apartments more suitable for remote work; others fled the city entirely for the suburbs or rural communities. With the nation’s housing stock relatively stagnant (in part because of pandemic-induced shortages of construction materials), housing prices rose. In some urban markets, rental prices initially fell during the pandemic’s first several months. But as vaccines rekindled city amenities, mass interest in a limited rental supply sent prices skyrocketing. Pandemic disruptions similarly sparked price surges in the automobile (thanks to semiconductor shortages), construction, and furniture and appliances sectors.
The international shipping market, a cost-input into countless commodities, proved particularly susceptible to Covid-19 disruptions. Rolling port shutdowns in East Asia, frantic scheduling shifts, and pandemic workforce fluctuations created ongoing and sustained scarcity in the container shipping sector. By September 2021, according to the Federal Reserve Bank of St. Louis, average shipping container costs were 800% higher than in February 2020.
Other Covid-19 factors exacerbated the supply-demand mismatch. Global supply chains proliferated across the American economy pre-pandemic. Once the virus struck, product availability became strained not just by new demand patterns, but also by the severity of, and local policy responses to, new Covid-19 outbreaks. Just as a supply chain wrinkle resolved itself in Vietnam or China, a new outbreak or lockdown elsewhere would upend the supply of a different critical component. And in the United States, a depressed labor force participation rate with various Covid-19 origins — including caregiving shortages and a spate of early retirements — has proved to be a further supply constraint. In sum, Covid-19 lies at the heart of our inflation crisis, which helps explain (alongside the war in Ukraine) why inflation has surged across the globe—not just in countries that deployed significant pandemic-era stimulus, like the United States.
Unlike the inflation events of the 1970s, wages for most Americans have not kept up with price increases. While the bottom quintile or so of earners have experienced wage growth that might mitigate the effects of inflation, that is not true for the majority of the subpopulation eligible for student debt relief, who mostly fall outside of this earning bracket; in the post-pandemic labor market, higher education and higher earnings levels have actually been associated with slower wage growth.
As a result, millions of student borrowers’ effective take home pay (after accounting for higher prices for housing, food and other typical expenses) has dropped. Once the loan pause terminates, these borrowers will be making payments out of a smaller pool of inflation-adjusted financial resources compared to the pre-pandemic status quo, even though the nominal amount of their monthly loan payment has remained unchanged in the interim thanks to the interest freeze. In the language of the HEROES Act, Covid-19-driven inflation will therefore put borrowers in a “worse position financially in relation to” their federal financial assistance because of their status as an “affected individual”—i.e., someone who has suffered economic hardship as a result of the national emergency. Conceptually, then, the administration’s discharge plan represents an effort to partially restore to borrowers’ paychecks the value lost to Covid-19-inflation.
Some may wonder whether this theory can survive an arbitrariness challenge. For example, if implementing the debt relief plan would cause a further spike in inflation, it might be irrational to justify it as a means of mitigating inflation’s wage erosion. However, Goldman Sachs and other analysts have concluded that the debt relief plan will effectively have no inflationary impact. (Indeed, compared to prolonging the status quo payment pause, it will have a disinflationary impact.)
Others, unpersuaded by the foregoing economic account, may contest whether inflation is a sufficiently “direct result” of the Covid-19 emergency, per the statute’s definition of “affected individuals.” Or they might, reading the same provision, question whether inflation counts as a “direct economic hardship.” (Though it would be difficult for the challengers to the debt plan at the Supreme Court to do so with a straight face, given they open their complaint with several paragraphs describing how “inflation has eroded the livelihood of the working class.”) Yet ultimately, disputing such characterizations is legally immaterial. Congress has expressly left determinations about the relationship between economic harm and a national emergency to the executive branch: recall from above that the statute appends the clause “as determined by the Secretary” to the relevant definition of “affected individuals.”
Some final notes. First, even though the federal government has not foregrounded this statutory theory in litigation, it remains a valid basis for affirming the plan. The Chenery principle instructs that courts may uphold agency action only for reasons that the agency itself considered when adopting its policy. Fortunately, the government explicitly, if somewhat briefly, invoked inflation in its initial decision memo.
Second, the Covid-19 inflation theory might especially appeal to conservative justices inclined to favor the straightforward reading of the HEROES Act text that supports the Biden plan, yet concerned about handing subsequent administrations sweeping precedent. Approving the discharge based on Covid-19 inflation — the product of a highly contingent cascade of events — would allow the Court to uphold the plan on narrow, empirically-constrained grounds.